Setting rates is a personal decision, but I’ll provide insights into my process
If you google “what’s the average rate of an ABC123 freelancer," you'll find all sorts of recommendations and information. Determining your rate can be extremely difficult. It's a gigantic “depends burger” with a side of fries (the market) and a shake (your competitors). You'll have to sort through the plethora of information, test, and decide what the market will accept. You’ll have to look at your knowledge, skills, experience, and unique selling proposition. You’ll need to find comparable competitors to analyze.When I started out, I spent hours researching rates specific to consulting. Then, rates specific to sub-categories of consulting. Next, I spent more time adding in factors such as my education, experience level, and all that jazz. Finally, I built an Excel with segmented rate and financial models. None of it held up. The depends burger strikes again.
For me, my rates as an Executive & Business Coach are different than my rates as a Strategy Consultant are different. However, I've gone through a lot of trail, error, and analysis to come up with my rates. The exercise below will help you deteremine the rates that are appropriate for you.
At first, you might think the next few pages are more personal finance advice versus rate advice. You are correct! Personal finance plays a central role in setting your rates. Stay with me. It will make sense in the end. Let’s cut to the chase and try to simplify this process a bit.
I’m going to provide an illustrative example. The math is NOT intended to be perfect. Instead, it’s designed to help you think through your rate-setting process from a holistic perspective.
High-level steps to determine rates
1) Determine how much you NEED to make in a year to survive2) Add a small, but "wants" amount (vacations, entertainment, dining out, new furniture, personal electronics, etc.)
3) How much for your contingency "oh crap" fund?
4) How much do you want to add to your savings and retirement accounts?
5) Add a tax estimate on top of that. I use a conservative number of 30%
Let’s use an illustrative example with round numbers to see where we stand:
1) NEEDS: Rent/Mortgage, Clothes, Utilities, Food, Car Payment, Credit Card Payments, Student Loans, Healthcare, and any other needs = $120,000 / year
2) Wants ($7500): $120K + $7.5K = $127,5003) Contingency ($7500): $127.5K + $7.5K = $135,000
4) Savings & Retirement ($10,000): $135 + $10K = $145,000
5) Tax Estimate (30%): 30% of $145K = $43.5K; $145K + $43.5K = $188,500
Again, let’s keep it simple and round up to $200,000. You’ll understand why I added another $11,500 in a second.
How does this illustrative calculation help you?
Now, you have a goal that you can use to determine your rates. “Whoa, wait! I’ll have to generate $200K in revenue to cover what you need, savings, contingency, wants, and taxes … Yes. This example isn’t to scare you. Instead, it’s to make sure you think through and plan for the reality! Now let’s talk about that extra $11,500.
We are missing something in this calculation
The amount could be large or small about depending on your business. Within the 5-step process, we didn’t calculate your startup or operating expense. Enter the extra $11,500. I have no way of determining your startup, monthly, or yearly operating expenses. Keep them as low as possible. $11,500 could be extremely high. You’ll have to estimate and factor those expenses into your rates at some point. For now, let’s use extra $11.5K as your startup and operating expenses and keep the overall revenue goal of $200K to continue the example.
How do we translate our above calculations into rates?
If we need and want to generate $200K in revenue, we can determine our “desired” rate. If you do a little research, you’ll find there are approximately 260 working days in a year. Now let’s do some calculations:
• $200,000 / 260 = $769 dollars per day
• $769 dollars per day / 8 hours = $96 dollars per hour
Great! So, if your goal is to generate $200K in revenue, you just calculated your rate. Your rate is approximately $100 per hour.
Sorry to do this again, but wait, this is an illustrative example. More than likely, you won’t have 40 hours of work every single week of the year. So, you’ll need to mitigate the potential for a variable workload. To do this, consider increasing your rate to $150 — $200 per hour.
What if you plan on charging a per project or flat fee rate? How do you calculate that rate? We’ll discuss that next.
Wait, I don’t charge per hour. I provide a flat rate per project
Hmmm…this might be true. But, if you aren’t calculating hours within your flat rates, you could be charging too much or too little. When I charge on a per project basis, I estimate how many hours the project will take. Then, I multiply the number of hours by my hourly rate. This calculation provides me with an estimate for my flat rate.
Example: 30 hours to complete Project A. Hourly Rate of $200. Flat fee rate of $6,000.
At this point, I may add or subtract from that number. Here comes the depends burger again. If it’s a new client with the potential for on-going projects, I might reduce my project rate. If it’s a rush project, I might increase my rate. There are other factors to think through as well. Will the “market” accept your rate? Or, is closest comparable competition charging less or more?
Where do people make the biggest mistake?
Let me be frank and excuse my language a bit. You WILL get kicked in the butt if you don’t KNOW your NEEDS and set aside money for taxes. You’ll be rolling along, having a great year, thinking, “Damn, I made $120K this year! Freaking amazing. I’ve covered all my needs.”
Then, boom! It’s tax season. You needed $120K. You made $120K. But wait, you forgot about taxes. “I owe what in taxes? Oh crap! I’m short. My cash flow is crushed. My bank account is sunk. Mom, dad, friend, brother, sister … can I borrow some money?”
Your mistake, you generated a “pre-tax” gross revenue of $120K. THIS IS NOT NET INCOME! If you don’t plan, set up your accounts, and automatically set aside part of your revenue for taxes, this can literally put you out of business. Done and dusted.
This happens all the time when someone switches from a position within a corporate environment over to solopreneurship. When you’re working for a company, your taxes, retirement, healthcare, and everything else is automatically deducted from your paycheck. It just happens. You don’t do a thing. You know your take-home pay and budget based on Net Income.
Now you’re in charge, and it’s a whole new ballgame. Don’t make this mistake. Talk with your financial advisor and accountant. Set up a bank account that, if possible, automatically transfer a certain percentage, for taxes, into a separate account.
The moment revenue drops into your business account, transfer funds into separate accounts for taxes, savings, retirement, etc.
This article is an excerpt from my Free Guide: “Going Solo – An Introductory Guide to Service Based ‘Solopreneurship.” If you found value in this article, feel free to download the guide here. It provides a ton of information on the fundamentals of starting and marketing your business.